FTC Officials Vow To Root Out Anticompetitive Noncompete Agreements

Key Takeaways

• The FTC hosted a virtual workshop on Jan. 27 titled "Moving Forward: Protecting Workers from Anticompetitive Noncompete Agreements," which included presentations from FTC Chairman Andrew Ferguson, Commissioner Mark Meador and other agency officials.
• FTC officials said they will continue to target "unfair" and "overbroad" noncompete agreements through individual enforcement actions.
• FTC officials provided key advice and examples that employers can utilize to revise their noncompete agreements, as applicable.

During the Jan. 27 workshop, Federal Trade Commission (FTC or the Commission) officials emphasized that they are committed to using all "lawful tools at [their] disposal" to go after "anticompetitive" noncompete agreements. The Commission also confirmed that it has no intention of renewing the Biden Administration's nationwide ban on most noncompete agreements.

Enforcement Priorities

FTC officials said the Trump-Vance Administration will review noncompete agreements on a case-by-case basis with an eye toward targeted enforcement. FTC Chairman Andrew Ferguson said that while he dissented from the Biden FTC's ban, that does not mean the Commission cannot, or will not, prosecute noncompete agreements that "lack justification" or have "adverse effects."

Ferguson stated that "companies with unjustified or anticompetitive noncompete agreements will incur a significant risk of legal action," emphasizing an entity that "imposes a noncompete agreement that is not tailored to achieve a pro-competitive objective, that is intended to suppress competition or the bargaining power of American workers, or that contains an unlimited scope or duration," may be subject to the FTC's enforcement powers. Ferguson declared that, under the Trump Administration's FTC, the "days of unreflective, unjustified, and anticompetitive noncompete agreements are over. If a company wants to execute a noncompete agreement, they had best be prepared to defend it.

Kelse Moen, deputy director of the FTC's Bureau of Competition and co-chair of the agency's Joint Labor Task Force, echoed Ferguson's position. He stated that "after today, there should be no confusion" about the fact that the Trump Administration will not "repeat the mistakes of the Biden Administration, but neither will we shrink from this fight."

Agency Actions

During the workshop, FTC officials highlighted the Commission's recent enforcement actions, including a complaint filed against a pet cremation company that imposed noncompete agreements on nearly all of its employees, and an order that a building services contractor cease enforcement of its no-hire agreements for low-wage workers performing janitorial, front desk, security and other services in the New Jersey and New York City markets.

"Today, at least 30 million Americans are impacted by noncompete clauses," Commissioner Mark Meador said in the workshop. "Many of these noncompetes, to be clear, would likely be unenforceable in court. They are scare tactics designed to take advantage of working people who don't have the money to get a lawyer to tell them this. It is an abusive tactic that makes life less affordable for the people who form the backbone of this country. Here at the Commission, we take this seriously."

FTC officials also reiterated that they are focused on targeting noncompete agreements in the healthcare industry. The Commission recently sent letters to healthcare employers and staffing firms urging them to review their noncompete agreements to ensure they are tailored to comply with the law.

Moving Forward

Commissioner Meador outlined a non-exhaustive list of "principles" and considerations that will inform how the FTC evaluates noncompete agreements. Although the guidance may help employers, none of the factors are singularly dispositive, and they highlight the Commission's focus on antitrust and employment law considerations:

1. Noncompetes are less appropriate when workers lack training and do not perform specialized functions as compared with higher-paid employees who have access to specialized training or information (if carefully tailored to business needs).
2. Noncompetes across distribution networks, such as those in the franchise context, can be anticompetitive to the extent they prevent independent operators from competing for employees.
3. Noncompetes are disfavored where there are less-restrictive alternatives available.
4. Noncompetes are more appropriate when an employer has made significant investments in training its workers.
5. Noncompetes that extend beyond one or two years and exceed the geographic scope of the employer's operations or the employee's work area or that impede the employee's ability to work in other lines of business are more likely to be considered anticompetitive.
6. If one employer has greater market power in a certain area, it raises greater competitive concerns that may undermine an argument in favor of the use of noncompetes. As stated by Meador: "If there are only a handful of buyers for an employee's labor, a noncompete has much more pronounced effect."
7. Evidence of economic effects is relevant to the analysis. As noted by Meador: "Is there widespread use of noncompetes across a whole sector?"
8. Is there potentially a horizontal agreement among competitors, like a no-poach agreement?
9. Do employees affected by noncompetes have an opportunity to challenge them by demonstrating pro-competitive effects?

Takeaways

In light of these remarks from FTC officials, employers may want to be more selective about utilizing noncompete agreements and more exacting in how they draft the contracts. This is especially true for those operating in the healthcare field. Indeed, while the actions of the FTC and the Department of Justice (and those of state attorneys general) indicate that they will investigate and prosecute noncompete agreements in a broad array of industries, the healthcare space has been a specific area of focus, as reiterated during the workshop.

Although the FTC has moved on from its broad noncompete ban, the Commission made clear that it will continue to use its enforcement authority to target and eliminate unfair and overreaching employment restrictions that are designed to reduce or suppress competition. Employers should continue to focus on federal agencies' guidance and stated priorities, as well as applicable state and local laws, to ensure they are prepared for continuing scrutiny.

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